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Marcato Capital Will Vote for Third Point's Sotheby's Slate

Stocks in this article: BID

NEW YORK (TheStreet) - Mick McGuire of Marcato Capital Management said on Tuesday the hedge fund will vote for Third Point Capital Management's activist slate of directors to Sotheby's (BID) board.

"We are voting for Third Point's directors," McGuire said at the IMN Active-Passive Investor conference in New York. 

Marcato took a stake in Sotheby's in the second half of 2013 with the belief that the art dealer had over a billion dollars of excess capital on its balance sheet and wasn't properly managing the company's finances. For instance, McGuire said on Tuesday, Sotheby's use of equity capital to fund its lending for art purchases caused the company to earn a return below its cost of capital on those loans.

While McGuire said he is focused on Sotheby's bottom line and driving balance sheet and operational efficiency, he noted Third Point appears more interested in revenue growth. If both hedge funds have different views on how to drive better performance at Sotheby's, McGuire said Marcato will support Third Point's board nominees given their ability to continue to engage management.

McGuire said voting in favor of Third Point's directors may alleviate the risk that Sotheby's board views recent corporate actions like a $300 million special dividend, and a replacement of its chief financial officer as a sign the company's work was complete.

"The work starts now," McGuire said. Marcato estimates over $1 billion of cash remains un-utilized on Sotheby's balance sheet.

January Changes

In January, Sotheby's said it will pay a $300 million special dividend to shareholders and that its board authorized a $150 million share repurchase program to offset dilution from annual stock rewards to employees.

The company also said it intends to return any excess capital to shareholders on an annual basis through special dividends. To improve its financial performance, Sotheby's also is looking into a sale of its York Avenue headquarters and relocating or reconfiguring the building toward leases.

"Sotheby's is now conducting a bidding process to explore these alternatives and expects to choose a path shortly," the company said, while noting it is conducting a similar process for its New Bond Street offices in London.

Finally, Sotheby's said it will establish separate capital structures and financial policies for the company's two main businesses; its Agency division where auctions and private sales are conducted, and its Sothebys Financial Services unit.

The auction house now expects that a better capital structure will allow for a 15% return on invested capital for the Agency business and a 20% return on equity for Financial Services. Sotheby's also said it has identified $22 million in other cost savings, generally on overhead administrative expenses.

"The message we are delivering is clear -- we are returning meaningful capital to our shareholders now and in the future and establishing a framework that puts Sotheby's in the strongest position to compete and win in this marketplace while delivering value to our clients," Sotheby's said in January.

Sotheby's benefited from booming art markets during 2013, which saw some auctions break new records for the industry. Auction sales at the company reached $5.1 billion in 2013, with highlights including record sales of pieces from Andy Warhol, Norman Rockwell, El Greco and Georges Braque. The company also noted rising sales of Islamic and Chinese art.

-- Written by Antoine Gara in New York.

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